UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 2016
OR
For the transition period from to
Commission file number 000-23211
CASELLA WASTE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Registrant’s telephone number, including area code: (802) 775-0325
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in rule 12b-2 of the Exchange Act. (Check One):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of April 15, 2016:
Class A common stock, $0.01 par value per share:
Class B common stock, $0.01 par value per share:
PART I.
ITEM 1. FINANCIAL STATEMENTS
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable - trade, net of allowance for doubtful accounts of $989 and $988, respectively
Refundable income taxes
Prepaid expenses
Inventory
Other current assets
Total current assets
Property, plant and equipment, net of accumulated depreciation and amortization of $802,815 and $789,766, respectively
Goodwill
Intangible assets, net
Restricted assets
Cost method investments
Other non-current assets
Total assets
The accompanying notes are an integral part of these consolidated financial statements.
1
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except for share and per share data)
CURRENT LIABILITIES:
Current maturities of long-term debt and capital leases
Accounts payable
Accrued payroll and related expenses
Accrued interest
Current accrued capping, closure and post-closure costs
Other accrued liabilities
Total current liabilities
Long-term debt and capital leases, less current portion
Accrued capping, closure and post-closure costs, less current portion
Deferred income taxes
Other long-term liabilities
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ DEFICIT:
Casella Waste Systems, Inc. stockholders’ deficit:
Class A common stock, $0.01 par value per share; 100,000,000 shares authorized; 40,243,000 and 40,064,000 shares issued and outstanding, respectively
Class B common stock, $0.01 par value per share; 1,000,000 shares authorized; 988,000 shares issued and outstanding, 10 votes per share
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive (loss) income, net of tax
Total Casella Waste Systems, Inc. stockholders’ deficit
Noncontrolling interests
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
2
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except for per share data)
Revenues
Operating expenses:
Cost of operations
General and administration
Depreciation and amortization
Divestiture transactions
Operating income
Other expense (income):
Interest income
Interest expense
(Gain) loss on debt extinguishment
Loss on derivative instruments
Other income
Other expense, net
Loss before income taxes
(Benefit) provision for income taxes
Net loss
Less: Net (loss) income attributable to noncontrolling interests
Net loss attributable to common stockholders
Basic and diluted earnings per share attributable to common stockholders:
Weighted average common shares outstanding
Basic and diluted earnings per share
3
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS
Other comprehensive loss, net of tax:
Unrealized loss resulting from changes in fair value of marketable securities
Other comprehensive loss, net of tax
Comprehensive loss
Less: Comprehensive (loss) income attributable to noncontrolling interests
Comprehensive loss attributable to common stockholders
4
CONSOLIDATED STATEMENT OF
STOCKHOLDERS’ DEFICIT
Balance, December 31, 2015
Other comprehensive loss
Issuances of Class A common stock
Stock-based compensation
Contribution from noncontrolling interest holder
Balance, March 31, 2016
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depletion of landfill operating lease obligations
Interest accretion on landfill and environmental remediation liabilities
Amortization of debt issuance costs and discount on long-term debt
Gain on sale of property and equipment
Changes in assets and liabilities, net of effects of acquisitions and divestitures:
Accounts receivable
Prepaid expenses, inventories and other assets
Accrued expenses and other liabilities
Net cash provided by (used in) operating activities
Cash Flows from Investing Activities:
Additions to property, plant and equipment
Payments on landfill operating lease contracts
Proceeds from divestiture transactions
Proceeds from sale of property and equipment
Net cash used in investing activities
Cash Flows from Financing Activities:
Proceeds from long-term borrowings
Principal payments on long-term debt
Payments of debt issuance costs
Change in restricted cash
Distributions to noncontrolling interest holder
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest
Income taxes, net of refunds
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Casella Waste Systems, Inc. (“Parent”), and its consolidated subsidiaries (collectively, “we”, “us” or “our”), is a regional, vertically integrated solid waste services company that provides collection, transfer, disposal, landfill, landfill gas-to-energy, recycling and organics services in the northeastern United States. We market recyclable metals, aluminum, plastics, paper and corrugated cardboard, which have been processed at our recycling facilities, as well as recyclables purchased from third-parties. We manage our solid waste operations on a geographic basis through two regional operating segments, the Eastern and Western regions, each of which provides a full range of solid waste services, and our larger-scale recycling and commodity brokerage operations through our Recycling segment. Organics services, ancillary operations, major account and industrial services, discontinued operations and earnings from equity method investees, as applicable, are included in our Other segment.
The accompanying unaudited consolidated financial statements, which include the accounts of the Parent, our wholly-owned subsidiaries and any partially owned entities over which we have a controlling financial interest, have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). All significant intercompany accounts and transactions are eliminated in consolidation. Investments in entities in which we do not have a controlling financial interest are accounted for under either the equity method or the cost method of accounting, as appropriate. Our significant accounting policies are more fully discussed in Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, which was filed with the SEC on March 2, 2016.
For comparative purposes, certain prior period amounts in the consolidated financial statements, including the presentation of debt issuance costs, have been reclassified to conform to the current period presentation. See Note 2, Accounting Changes for discussion regarding changes to the presentation of debt issuance costs and Note 5, Long-Term Debt for the updated disclosure.
Preparation of our consolidated financial statements in accordance with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with a high degree of precision given the available data, or simply cannot be readily calculated. In the opinion of management, these consolidated financial statements include all adjustments, which include normal recurring and nonrecurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The results for the three months ended March 31, 2016 may not be indicative of the results for any other interim period or the entire fiscal year. The consolidated financial statements presented herein should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
Subsequent Events
We have evaluated subsequent events or transactions that have occurred after the consolidated balance sheet date of March 31, 2016, but prior to the filing of the consolidated financial statements with the SEC on this Quarterly Report on Form 10-Q. We have determined that, except as disclosed, there are no subsequent events that require disclosure in this Quarterly Report on Form 10-Q.
7
The following table provides a brief description of recent Accounting Standards Updates (“ASUs”) to the Accounting Standards Codification (“ASC”) issued by the Financial Accounting Standards Board (“FASB”) deemed to have a material effect on our consolidated financial statements upon adoption:
Standard
Description
Effect on the Financial Statements or OtherSignificant Matters
Accounting standards that were adopted effective January 1, 2016
The following table provides a brief description of recent accounting pronouncements that may have a material effect on our consolidated financial statements upon adoption:
Accounting standards that are not yet adopted
8
Intangible assets consisted of the following:
Intangible assets
Less accumulated amortization
Intangible amortization expense for the three months ended March 31, 2016 and 2015 was $524 and $749, respectively.
Estimated Future Amortization Expense as of March 31, 2016:
For the fiscal year ending December 31, 2016
For the fiscal year ending December 31, 2017
For the fiscal year ending December 31, 2018
For the fiscal year ending December 31, 2019
For the fiscal year ending December 31, 2020
Thereafter
Accrued final capping, closure and post-closure costs include the current and non-current portion of costs associated with obligations for final capping, closure and post-closure of our landfills. We estimate our future final capping, closure and post-closure costs in order to determine the final capping, closure and post-closure expense per ton of waste placed into each landfill. The anticipated timeframe for paying these costs varies based on the remaining useful life of each landfill, as well as the duration of the post-closure monitoring period. The changes to accrued final capping, closure and post-closure liabilities are as follows:
Beginning balance
Obligations incurred
Accretion expense
Obligations settled (1)
Ending balance
9
Long-term debt and capital leases consisted of the following:
Senior Secured Asset-Based Revolving Credit Facility:
Due February 2020; bearing interest at one-month LIBOR plus 2.25%
Tax-Exempt Bonds:
New York State Enviornmental Facilities Corporation Solid Waste Disposal Revenue Bonds Series 2014 due December 2044 - fixed rate interest period through 2019, bearing interest at 3.75%
Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2005R-2 due January 2025 - fixed rate interest period through 2017, bearing interest at 6.25%
Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2015 due August 2035 - fixed rate interest period through 2025, bearing interest at 5.125%
Vermont Economic Development Authority Solid Waste Disposal Long-Term Revenue Bonds Series 2013 due April 2036 - fixed rate interest period through 2018, bearing interest at 4.75%
Business Finance Authority of the State of New Hampshire Solid Waste Disposal Revenue Bonds Series 2013 due April 2029 - fixed rate interest period through 2019, bearing interest at 4.00%
Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2005R-1; letter of credit backed due January 2025 - variable rate interest period through 2017, bearing interest at SIFMA Index
Other:
Capital leases maturing through April 2023, bearing interest at up to 7.70%
Notes payable maturing through December 2017, bearing interest at up to 7.00%
Senior Subordinated Notes:
Due February 2019; bearing interest at 7.75%
Principal amount of long-term debt and capital leases
Less—unamortized discount and debt issuance costs (1)
Long-term debt and capital leases less unamortized discount and debt issuance costs
Less—current maturities of long-term debt
Senior Secured Asset-Based Revolving Credit Facility
New York State Enviornmental Facilities Corporation Solid Waste Disposal Revenue Bonds Series 2014
Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2005R-2
Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2015
Vermont Economic Development Authority Solid Waste Disposal Long-Term Revenue Bonds Series 2013
Business Finance Authority of the State of New Hampshire Solid Waste Disposal Revenue Bonds Series 2013
Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2005R-1
Senior Subordinated Notes
(Gain) Loss on Debt Extinguishment
Senior Subordinated Notes. In the three months ended March 31, 2016, we repurchased and permanently retired $4,230 aggregate principal amount of 7.75% senior subordinated notes due February 2019 (“2019 Notes”) at a repurchase price of $96.75 in order to maximize interest savings by paying down our most expensive debt. As a result of the repurchase, we recorded a gain on debt extinguishment of $48 in the three months ended March 31, 2016 related to the non-cash gain associated with the below par repurchase price, net of the write off of debt issuance costs and unamortized original issue discount in proportion with the settlement amount.
Senior Credit Facility. In the three months ended March 31, 2015, we recorded a charge of $521 as a loss on debt extinguishment related to the write-off of debt issuance costs in connection with changes to the borrowing capacity from the
10
senior revolving credit and letter of credit facility that was due March 2016 (“Senior Credit Facility”) to the new senior secured asset-based revolving credit and letter of credit facility due February 2020 (“ABL Facility”). The remaining unamortized deferred financing costs of the Senior Credit Facility, along with fees paid to the creditor and third-party costs incurred for the ABL Facility, are to be amortized over the term of the ABL Facility.
Legal Proceedings
In the ordinary course of our business and as a result of the extensive governmental regulation of the solid waste industry, we are subject to various judicial and administrative proceedings involving state and local agencies. In these proceedings, an agency may seek to impose fines or to revoke or deny renewal of an operating permit held by us. From time to time, we may also be subject to actions brought by special interest or other groups, adjacent landowners or residents in connection with the permitting and licensing of landfills and transfer stations, or allegations of environmental damage or violations of the permits and licenses pursuant to which we operate. In addition, we have been named defendants in various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the ordinary operation of a waste management business.
In accordance with FASB ASC 450-20, we accrue for legal proceedings, inclusive of legal costs, when losses become probable and reasonably estimable. As of the end of each applicable reporting period, we review each of our legal proceedings to determine whether it is probable, reasonably possible or remote that a liability has been incurred and, if it is at least reasonably possible, whether a range of loss can be reasonably estimated under the provisions of FASB ASC 450-20. In instances where we determine that a loss is probable and we can reasonably estimate a range of loss we may incur with respect to such a matter, we record an accrual for the amount within the range that constitutes our best estimate of the possible loss. If we are able to reasonably estimate a range, but no amount within the range appears to be a better estimate than any other, we record an accrual in the amount that is the low end of such range. When a loss is reasonably possible, but not probable, we will not record an accrual, but we will disclose our estimate of the possible range of loss where such estimate can be made in accordance with FASB ASC 450-20.
Expera Old Town, LLC v. Casella Waste Systems, Inc.
On or about November 6, 2015, Expera Old Town, LLC (“Expera”) filed a lawsuit against us in Maine Superior Court, seeking damages for breach of contract and unjust enrichment and an action for declaratory judgment (“Lawsuit”). Expera was a successor-in-interest to a contract between us and Old Town Fuel and Fiber (“OTFF”), the former owner of a pulp manufacturing facility (“Facility”) located in Old Town, Maine (“Contract”). Expera purchased the Facility during the pendency of the bankruptcy of OTFF. Since the filing of the Lawsuit, Expera has sold the Facility and related assets to MFGR LLC (“MFGR”). MFGR alleged that we had the obligation to provide a specialized type of wood fuel to the Facility or, alternatively, that we owed a “Fuel Replacement Fee” of up to $2,000 a year (subject to the possibility of certain credits against such payments). The Contract was to expire in 2036.
On or about February 10, 2016, we reached an agreement in principle with MFGR to dismiss the Lawsuit with prejudice, and to resolve all outstanding claims of any nature including future claims which could arise under the Contract, and a Joint Stipulation of Dismissal with Prejudice was filed with the Superior Court on April 15, 2016. On or about April 12, 2016, the Parties entered into a Settlement Agreement (“SA”) along with other ancillary agreements. Pursuant to the SA, we will pay MFGR $1,250 upon execution of the SA, and $350 a year for five years following execution of the SA. Accordingly, taking into account the net present value of the settlement payments, we have recorded a reserve of $2,616 as of March 31, 2016. This includes a contract settlement charge of $1,940 and $676 of operating expenses recorded in the fiscal year ended December 31, 2015. We also have reserved $46 as of March 31, 2016 for legal costs associated with the Lawsuit and SA.
We have also entered into a new leachate disposal agreement at market prices with MFGR for the treatment of leachate from the landfill managed by us for the state of Maine located in Old Town, Maine (“Juniper Ridge”), and MFGR has entered into a waste disposal agreement at market prices with us for the disposal at Juniper Ridge of waste materials produced in the demolition or re-purposing of the Facility.
11
Environmental Remediation Liability
We are subject to liability for environmental damage, including personal injury and property damage, that our solid waste, recycling and power generation facilities may cause to neighboring property owners, particularly as a result of the contamination of drinking water sources or soil, possibly including damage resulting from conditions that existed before we acquired the facilities. We may also be subject to liability for similar claims arising from off-site environmental contamination caused by pollutants or hazardous substances if we or our predecessors arrange or arranged to transport, treat or dispose of those materials. The following matters represents our potential or outstanding material claims.
Southbridge Recycling & Disposal Park, Inc.
In October 2015, our Southbridge Recycling and Disposal Park, Inc. (“SRD”) subsidiary reported to the Massachusetts Department of Environmental Protection (“MADEP”) results of analysis of samples collected pursuant to our existing permit from private drinking water wells located near the landfill operated by SRD. Those results indicated the presence of contaminants above the levels triggering notice and response obligations under MADEP regulations. In response to those results, we are carrying out an Immediate Response Action pursuant to state law. Further, we have implemented a plan to analyze and better understand the groundwater near the landfill and we are investigating with the objective of identifying the source or sources of the elevated levels of contamination measured in the well samples. If it is determined that some or all of the contamination originated at the landfill, we will work with the Town of Southbridge, the landfill owner, to evaluate and possibly allocate the liabilities related to that contamination. In February 2016, we received a Notice of Intent to Sue under the Resource Conservation and Recovery Act from a law firm representing residents from approximately 40 homes located in the vicinity of the landfill, indicating its intent to file suit against us. We believe it is reasonably possible that a loss may occur as a result of this potential matter although an estimate of loss cannot be reasonably estimated at this time.
Potsdam Environmental Remediation Liability
On December 20, 2000, the State of New York Department of Environmental Conservation (“DEC”) issued an Order on Consent (“Order”) which named Waste-Stream, Inc. (“WSI”), our subsidiary, General Motors Corporation (“GM”) and Niagara Mohawk Power Corporation (“NiMo”) as Respondents. The Order required that the Respondents undertake certain work on a 25-acre scrap yard and solid waste transfer station owned by WSI in Potsdam, New York, including the preparation of a Remedial Investigation and Feasibility Study (“Study”). A draft of the Study was submitted to the DEC in January 2009 (followed by a final report in May 2009). The Study estimated that the undiscounted costs associated with implementing the preferred remedies would be approximately $10,219. On February 28, 2011, the DEC issued a Proposed Remedial Action Plan for the site and accepted public comments on the proposed remedy through March 29, 2011. We submitted comments to the DEC on this matter. In April 2011, the DEC issued the final Record of Decision (“ROD”) for the site. The ROD was subsequently rescinded by the DEC for failure to respond to all submitted comments. The preliminary ROD, however, estimated that the present cost associated with implementing the preferred remedies would be approximately $12,130. The DEC issued the final ROD in June 2011 with proposed remedies consistent with its earlier ROD. An Order on Consent and Administrative Settlement naming WSI and NiMo as Respondents was executed by the Respondents and DEC with an effective date of October 25, 2013. On January 29, 2016, a Cost-Sharing Agreement was executed between WSI, NiMo, Alcoa Inc. (“Alcoa”) and Reynolds Metal Company (“Reynolds”) whereby Alcoa and Reynolds elected to voluntarily participate in the onsite remediation activities at a 15% participant share. It is unlikely that any significant expenditures relating to onsite remediation will be incurred until the fiscal year ending December 31, 2017. WSI is jointly and severally liable with NiMo, Alcoa and Reynolds for the total cost to remediate.
We have recorded an environmental remediation liability associated with the Potsdam site based on incurred costs to date and estimated costs to complete the remediation in other accrued liabilities and other long-term liabilities. Our expenditures could be significantly higher if costs exceed estimates. We inflate the estimated costs in current dollars to the expected time of payment and discount the total cost to present value using a risk free interest rate of 1.8%. The changes to the environmental remediation liability associated with the Potsdam environmental remediation liability are as follows:
12
Stock Based Compensation
Shares Available For Issuance
In the fiscal year ended April 30, 2007, we adopted the 2006 Stock Incentive Plan (“2006 Plan”). The 2006 Plan was amended in the fiscal year ended April 30, 2010. Under the 2006 Plan, we may grant awards up to an aggregate amount of shares equal to the sum of: (i) 2,475 shares of Class A common stock (subject to adjustment in the event of stock splits and other similar events), plus (ii) such additional number of shares of Class A common stock as were subject to stock options granted under our 1993 Incentive Stock Option Plan, 1994 Non-statutory Stock Option Plan, 1996 Stock Option Plan, and 1997 Stock Incentive Plan (“Prior Plans”), which were not actually issued under the Prior Plans because such stock options expire or otherwise result in shares not being issued. As of March 31, 2016, there were 546 Class A common stock equivalents available for future grant under the 2006 Plan, inclusive of additional Class A common stock equivalents that were previously issued under our terminated plans and have become available for grant because such awards expired or otherwise resulted in shares not being issued. No awards may be granted under the 2006 Plan after October 10, 2016 and accordingly we expect to implement a new stock incentive plan which would be recommended to stockholders for approval at the 2016 Annual Meeting of Stockholders.
Stock Options
Stock options granted under the 2006 Plan are granted at a price equal to the prevailing fair market value of our Class A common stock at the date of grant. Generally, stock options granted have a term not to exceed ten years and vest over a one to four year period from the date of grant.
The following table summarizes stock option activity:
Outstanding, December 31, 2015
Granted
Exercised
Forfeited
Outstanding, March 31, 2016
Exercisable, March 31, 2016
Expected to vest, March 31, 2016
Stock-based compensation expense for stock options was $146 during the three months ended March 31, 2016, as compared to $157 during the three months ended March 31, 2015.
As of March 31, 2016, total unrecognized stock-based compensation expense related to outstanding stock options was $1,078, which will be recognized over a weighted average period of 2.1 years.
Other Stock Awards
We grant restricted stock awards, restricted stock units and performance-based stock units under the 2006 Plan at a price equal to the fair market value of our Class A common stock at the date of grant. Restricted stock awards granted to non-employee directors vest incrementally over a three year period beginning on the first anniversary of the date of grant. Restricted stock units vest incrementally over an identified service period beginning on the grant date based on continued employment. Performance-based stock units vest at a future date following the grant date and are based on the attainment of certain performance targets.
13
The following table summarizes restricted stock, restricted stock unit and performance-based stock unit activity:
Class A Common Stock Vested
Stock-based compensation expense related to restricted stock, restricted stock units and performance-based stock units was $550 during the three months ended March 31, 2016, as compared to $486 during the three months ended March 31, 2015.
During the three months ended March 31, 2016, the total fair value of other stock awards vested was $1,006.
As of March 31, 2016, total unrecognized compensation expense related to outstanding restricted stock and restricted stock units was $3,839, which will be recognized over a weighted average period of 1.9 years. Maximum unrecognized stock-based compensation expense as of March 31, 2016 related to outstanding performance-based stock units was $451 to be recognized over a weighted average period of 2.8 years.
We also recorded $26 of stock-based compensation expense related to our Amended and Restated 1997 Employee Stock Purchase Plan during the three months ended March 31, 2016, as compared to $17 during the three months ended March 31, 2015.
Accumulated Other Comprehensive (Loss) Income
The changes in the balances of each component of accumulated other comprehensive (loss) income are as follows:
Balance as of December 31, 2015
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive loss
Net current-period other comprehensive loss
Balance as of March 31, 2016
14
The following table sets forth the numerator and denominator used in the computation of earnings per share:
Numerator:
Denominator:
Number of shares outstanding, end of period:
Class A common stock
Class B common stock
Unvested restricted stock
Effect of weighted average shares outstanding
Antidilutive potentially issuable shares
We use a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. These tiers include: Level 1, defined as quoted market prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; and Level 3, defined as unobservable inputs that are not corroborated by market data.
We use valuation techniques that maximize the use of market prices and observable inputs and minimize the use of unobservable inputs. In measuring the fair value of our financial assets and liabilities, we rely on market data or assumptions which we believe market participants would use in pricing an asset or a liability.
Assets and Liabilities Accounted for at Fair Value
Our financial instruments for the periods reported below include cash and cash equivalents, restricted investments held in trust on deposit with various banks as collateral for our obligations relative to our landfill final capping, closure and post-closure costs, restricted cash reserved to finance certain capital projects, trade receivables, interest rate derivatives, trade payables and long-term debt. The carrying values of cash and cash equivalents, trade receivables and trade payables approximate their respective fair values due to their short-term nature. The fair value of restricted investments held in trust and restricted cash, which are valued using quoted market prices, are included as restricted assets in the Level 1 tier below. The fair value of the interest rate derivative, included in the Level 2 tier below, was calculated based on a valuation obtained from our counter-party based primarily on the three month LIBOR yield curve that is observable at commonly quoted intervals for the full term of the swap. The interest rate derivative matured on March 15, 2016. We recognize all derivatives on the balance sheet at fair value.
15
Our financial assets and liabilities that are measured at fair value on a recurring basis include the following:
Assets:
Restricted assets - landfill closure
Restricted assets - capital projects
Total
Liabilities:
Interest rate derivative
Fair Value of Debt
As of March 31, 2016, the fair value of our fixed rate debt, including our 2019 Notes, Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2005R-2 (“FAME Bonds 2005R-2”), Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2015 (“FAME Bonds 2015”), Vermont Economic Development Authority Solid Waste Disposal Long-Term Revenue Bonds Series 2013 (“Vermont Bonds”), New York State Environmental Facilities Corporation Solid Waste Disposal Revenue Bonds Series 2014 (“New York Bonds”) and Solid Waste Disposal Revenue Bonds Series 2013 issued by the Business Finance Authority of the State of New Hampshire (“New Hampshire Bonds”) was approximately $463,484 and the carrying value was $454,470. The fair value of the 2019 Notes are considered to be Level 1 within the fair value hierarchy as the fair value is based off of a quoted market price in an active market. The fair value of the FAME Bonds 2005R-2, the FAME Bonds 2015, the Vermont Bonds, the New York Bonds and the New Hampshire Bonds is considered to be Level 2 within the fair value hierarchy as the fair value is determined using market approach pricing provided by a third-party that utilizes pricing models and pricing systems, mathematical tools and judgment to determine the evaluated price for the security based on the market information of each of the bonds or securities with similar characteristics.
Although we have determined the estimated fair value amounts of the FAME Bonds 2005R-2, the FAME Bonds 2015, the Vermont Bonds, the New York Bonds and the New Hampshire Bonds using available market information and commonly accepted valuation methodologies, a change in available market information, and/or the use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values. These amounts have not been revalued, and current estimates of fair value could differ significantly from the amounts presented. As of March 31, 2016, the fair value of our ABL Facility is considered to be Level 2 within the fair value hierarchy as the fair value approximates its carrying value of $68,000 based on current borrowing rates for similar types of borrowing arrangements. The carrying value of our remaining material variable rate debt, the Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2005R-1, approximates fair value because the interest rate for the debt instrument is based on a market index that approximates current market rates for instruments with similar risk and maturities.
16
Maine Energy
In the fiscal year ended April 30, 2013, we executed a purchase and sale agreement with the City of Biddeford, Maine, pursuant to which we agreed to sell the real property of Maine Energy Recovery Company, LP (“Maine Energy”) to the City of Biddeford. We agreed to sell Maine Energy for an undiscounted purchase consideration of $6,650, which was to be paid to us in installments over twenty-one years. The transaction closed in November 2012. In December 2012, we ceased operations of the Maine Energy facility and initiated the decommissioning, demolition and site remediation process in accordance with the provisions of the agreement. We have completed the demolition process and site remediation under the auspices and in accordance with work plans approved by the Maine Department of Environmental Protection and the U.S. Environmental Protection Agency. In consideration of the fact that the project was substantially completed and based on incurred costs to date and estimates at that time regarding the remaining costs to fulfill our obligation under the purchase and sale agreement, we reversed a reserve of $1,157 of excess costs to complete the divestiture in the three months ended March 31, 2015. As of March 31, 2016, we had no remaining costs to complete the divestiture accrued as we had fulfilled our obligation under the agreement.
CARES and Related Transaction
Casella-Altela Regional Environmental Services, LLC (“CARES”) is a joint venture that owned and operated a water and leachate treatment facility for the natural gas drilling industry in Pennsylvania. Our joint venture partner in CARES is Altela, Inc. (“Altela”). As of March 31, 2016, our ownership interest in CARES was 51%. In accordance with FASB ASC 810-10-15, we consolidate the assets, liabilities and results of operations of CARES into our consolidated financial statements due to our controlling financial interest in the joint venture.
On February 9, 2015, we executed a purchase and sale agreement pursuant to which we and Altela agreed to sell certain assets of the CARES water treatment facility to an unrelated third-party. We sold these assets of CARES for purchase consideration of $3,500, resulting in a gain of $2,850 in the three months ended March 31, 2015, 49% of which was attributable to Altela, the noncontrolling interest holder. In connection with this transaction, we also sold certain of our equipment and real estate to the same buyer for total consideration of $1,050, resulting in a gain of $928 in the three months ended March 31, 2015.
As of March 31, 2016, we were proceeding with dissolution of CARES in accordance with the CARES Limited Liability Company Agreement.
We report selected information about operating segments in a manner consistent with that used for internal management reporting. We classify our solid waste operations on a geographic basis through regional operating segments, the Western and Eastern regions. Revenues associated with our solid waste operations are derived mainly from solid waste collection and disposal, landfill, landfill gas-to-energy, transfer and recycling services in the northeastern United States. Our revenues in the Recycling segment are derived from municipalities and customers in the form of processing fees, tipping fees and commodity sales. Organics services, ancillary operations, major account and industrial services, discontinued operations, and earnings from equity method investees, as applicable, are included in our Other segment.
Three Months Ended March 31, 2016
Segment
Eastern
Western
Recycling
Other
Eliminations
17
Three Months Ended March 31, 2015
Amounts of our total revenue attributable to services provided are as follows:
Collection
Disposal
Power generation
Processing
Solid waste operations
Organics
Customer solutions
Total revenues
Our 2019 Notes are guaranteed jointly and severally, fully and unconditionally, by our significant wholly-owned subsidiaries. The Parent is the issuer and a non-guarantor of the 2019 Notes and the Parent has no independent assets or operations. The information which follows presents the condensed consolidating financial position as of March 31, 2016 and December 31, 2015, the consolidating results of operations and comprehensive loss for the three months ended March 31, 2016 and 2015, and the condensed consolidating statements of cash flows for the three months ended March 31, 2016 and 2015 of (a) the Parent company only, (b) the combined guarantors (“Guarantors”), each of which is 100% wholly-owned by the Parent, (c) the combined non-guarantors (“Non-Guarantors”), (d) eliminating entries and (e) the consolidated total.
18
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2016
Accounts receivable - trade, net
Property, plant and equipment, net
Investments in subsidiaries
Intercompany receivable
Accrued capping, closure and post-closure costs,
less current portion
Casella Waste Systems, Inc. stockholders’ deficit
19
AS OF DECEMBER 31, 2015
20
CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2016
Operating income (loss)
Earnings from consolidated entities
21
THREE MONTHS ENDED MARCH 31, 2015
22
CONSOLIDATING STATEMENT OF COMPREHENSIVE LOSS
Less: Comprehensive loss attributable to noncontrolling interests
Comprehensive (loss) income attributable to common stockholders
23
24
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Intercompany borrowings
25
Payments related to investments
26
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto included under Item 1. In addition, reference should be made to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the Securities and Exchange Commission (“SEC”) on March 2, 2016.
This Quarterly Report on Form 10-Q and, in particular, this Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended (“Exchange Act”), including:
In addition, any statements contained in or incorporated by reference into this report that are not statements of historical fact should be considered forward-looking statements. You can identify these forward-looking statements by the use of the words “believes”, “expects”, “anticipates”, “plans”, “may”, “will”, “would”, “intends”, “estimates” and other similar expressions, whether in the negative or affirmative. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate, as well as management’s beliefs and assumptions, and should be read in conjunction with our consolidated financial statements and notes thereto. These forward-looking statements are not guarantees of future performance, circumstances or events. The occurrence of the events described and the achievement of the expected results depends on many events, some or all of which are not predictable or within our control. Actual results may differ materially from those set forth in the forward-looking statements.
There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements. These risks and uncertainties include, without limitation, those detailed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. There may be additional risks of which we are not presently aware or that we currently believe are immaterial which could have an adverse impact on our business. We explicitly disclaim any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise, except as otherwise required by law.
27
Company Overview
Founded in 1975 with a single truck, Casella Waste Systems, Inc., a Delaware corporation, its wholly-owned subsidiaries and certain partially owned entities over which it has a controlling financial interest (collectively, “we”, “us” or “our”), is a regional, vertically-integrated solid waste services company. We provide resource management expertise and services to residential, commercial, municipal and industrial customers, primarily in the areas of solid waste collection and disposal, transfer, recycling and organics services. We provide integrated solid waste services in six states: Vermont, New Hampshire, New York, Massachusetts, Maine and Pennsylvania, with our headquarters located in Rutland, Vermont. We manage our solid waste operations on a geographic basis through two regional operating segments, the Eastern and Western regions, each of which provides a full range of solid waste services, and our larger-scale recycling and commodity brokerage operations through our Recycling segment. Organics services, ancillary operations, major account and industrial services, discontinued operations, and earnings from equity method investees are included in our Other segment, as applicable.
As of April 15, 2016, we owned and/or operated 34 solid waste collection operations, 44 transfer stations, 18 recycling facilities, nine Subtitle D landfills, four landfill gas-to-energy facilities and one landfill permitted to accept construction and demolition (“C&D”) materials.
Results of Operations
We manage our solid waste operations, which include a full range of solid waste services, on a geographic basis through two regional operating segments, which we designate as the Eastern and Western regions. Revenues in our Eastern and Western regions consist primarily of fees charged to customers for solid waste collection and disposal, landfill, landfill gas-to-energy, transfer and recycling services. We derive a substantial portion of our collection revenues from commercial, industrial and municipal services that are generally performed under service agreements or pursuant to contracts with municipalities. The majority of our residential collection services are performed on a subscription basis with individual households. Landfill and transfer customers are charged a tipping fee on a per ton basis for disposing of their solid waste at our disposal facilities and transfer stations. We also generate and sell electricity at certain of our landfill facilities. In addition, revenues from our Recycling segment consist of revenues derived from municipalities and customers in the form of processing fees, tipping fees and commodity sales. Revenues from organics services, ancillary operations, and major account and industrial services are included in our Other segment. Our revenues are shown net of inter-company eliminations.
Revenues attributable to service provided (dollars in millions) are as follows:
28
The period-to-period change in total solid waste revenues (dollars in millions) is as follows:
Price
Volume
Commodity price and volume
Acquisitions and divestitures
Total solid waste
Solid waste revenues
Price.
Volume.
Commodity price and volume.
Acquisitions and divestitures.
Organics revenues
Customer Solutions revenues
Recycling revenues
29
Operating Expenses
Cost of operations, general and administration expense and depreciation and amortization expense (dollars in millions and as a percentage of revenues) are as follows:
Cost of Operations
Cost of operations includes labor costs, tipping fees paid to third-party disposal facilities, fuel costs, maintenance and repair costs of vehicles and equipment, workers’ compensation and vehicle insurance costs, the cost of purchasing materials to be recycled, third-party transportation costs, district and state taxes, and host community fees and royalties. Cost of operations also includes accretion expense related to final capping, closure and post-closure obligations, leachate treatment and disposal costs and depletion of landfill operating lease obligations.
The period-to-period change in cost of operations can be primarily attributed to the following:
General and Administration
General and administration expense includes management, clerical and administrative compensation, bad debt expense, as well as overhead costs, professional service fees and costs associated with marketing, sales force and community relations efforts.
The period-to-period change in general and administration expense can be primarily attributed to the following:
Depreciation and Amortization
Depreciation and amortization includes: (i) depreciation of property and equipment (including assets recorded for capital leases, on a straight-line basis over the estimated useful lives of the assets); (ii) amortization of landfill costs (including those costs incurred and all estimated future costs for landfill development and construction, along with asset retirement costs arising from closure and post-closure obligations) on a units-of-consumption method as landfill airspace is consumed over the total estimated remaining capacity of
30
a site, which includes both permitted capacity and unpermitted expansion capacity that meets our criteria for amortization purposes; (iii) amortization of landfill asset retirement costs arising from final capping obligations on a units-of-consumption method as airspace is consumed over the estimated capacity associated with each final capping event; and (iv) amortization of intangible assets with a definite life, using either an economic benefit provided approach or a straight-line basis over the definitive terms of the related agreements.
The components of depreciation and amortization expense (dollars in millions and as a percentage of revenues) are as follows:
Depreciation expense
Landfill amortization expense
Other amortization expense
The period-to-period change in depreciation and amortization expense can be primarily attributed to increased landfill amortization expense due to higher landfill volumes in both our Eastern and Western regions and an overall increase in our average amortization rate.
Divestiture Transactions
In the three months ended March 31, 2015, we recorded a gain of $4.9 million associated with the divestiture of Maine Energy Recovery Company, LP (“Maine Energy”) and the sale of certain assets of the Casella-Altela Regional Environmental Services, LLC (“CARES”) water treatment facility, along with certain other equipment and real estate of ours, to a third-party. See Note 10, Divestiture Transactions to our consolidated financial statements included under Item 1 of this Quarterly Report on Form 10-Q for further disclosure.
Other Expenses
Interest Expense, net
Our interest expense, net decreased $0.1 million in the three months ended March 31, 2016 as compared to the same period in the prior year. The change in interest expense is primarily due to lower average debt balances in the three months ended March 31, 2016 and changes to our capitalization structure. Specifically, in order to reduce costs and our exposure to financing and interest rate risk, we repurchased and retired $18.9 million of our most expensive debt, the 7.75% 2019 Notes, since September 2015; we completed the issuance of $15.0 million of Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2015 (“FAME Bonds 2015”) in August 2015; and we completed the refinancing of our senior revolving credit and letter of credit facility that was due March 2016 (“Senior Credit Facility”), which included the issuance of an additional $60.0 million of 2019 Notes, in February 2015.
We recorded a less than $0.1 million gain on debt extinguishment in the three months ended March 31, 2016 associated with the below par repurchase of $4.2 million aggregate principal amount of 2019 Notes and a $0.5 million loss on debt extinguishment in the three months ended March 31, 2015 associated with the refinancing of our Senior Credit Facility. See Note 5, Long-Term Debt to our consolidated financial statements included under Item 1 of this Quarterly Report on Form 10-Q for further disclosure.
Loss on Derivative Instruments
We were party to an interest rate derivative agreement for an interest rate swap that was not considered to be an effective cash flow hedge, which matured in the three months ended March 31, 2016. We recognized the change in fair value of the interest rate swap along with any cash settlements through earnings as a (gain) or loss on derivative instruments.
31
(Benefit) Provision for Income Taxes
Our provision for income taxes decreased $0.7 million to an income tax benefit during the three months ended March 31, 2016 as compared to the same period in the prior year. The (benefit) and provision for income taxes include approximately $0.1 million and $0.2 million deferred tax provisions for the three months ended March 31, 2016 and March 31, 2015, respectively, due to the increase in the deferred tax liability for indefinite lived assets. Since we cannot determine when the deferred tax liability related to indefinite lived assets will reverse, this amount cannot be used as a future source of taxable income against which to benefit deferred tax assets.
In connection with New York State’s audit of our tax returns for fiscal years ended April 30, 2011 through 2013, the State had alleged that we were not permitted to file a single combined corporation franchise tax return with our subsidiaries. During the three months ended March 31, 2015, as a result of discussions with New York State, we decided to settle the audit for an amount less than 8.0% of the total cumulative liability in order to minimize the out-of-pocket costs and potential litigation. As a result of these discussions, we recorded a $0.2 million gross increase in uncertain tax positions in the three months ended March 31, 2015 related to the settlement with New York State. This settlement was finalized in August 2015 for $0.2 million. As a result of these discussions, as well as a net unfavorable reversal of a portion of other positions due to the expiration of the statute of limitations, we recorded an increase in the reserve for uncertain tax positions of $0.4 million during the three months ended March 31, 2015. During the three months ended March 31, 2016, we recorded a decrease in the reserve for uncertain tax positions of $0.3 million due to the expiration of the statute of limitations on other positions.
Segment Reporting
Revenues and operating income (loss) by operating segment (in millions) are as follows:
Eastern Region
32
After taking into consideration the $1.2 million impact of the Maine Energy divestiture reserve reversal in the three months ended March 31, 2015, our operating performance in the three months ended March 31, 2016 improved due to the revenue growth outlined above, partially offset by the following cost changes:
Western Region
The period-to-period change in revenues (dollars in millions) is as follows:
33
After taking into consideration the $3.8 million impact of the gain associated with the disposal of certain assets of the CARES water treatment facility and certain of our equipment and real estate in a related transaction in the three months ended March 31, 2015, our operating performance in the three months ended March 31, 2016 improved due to the revenue growth outlined above, partially offset by the following cost changes:
Improved operating performance is the result of increased revenues from tipping fees associated with higher commodity volumes and reduced rebates to offset lower recycling commodity pricing, more than covering the impact of higher labor costs and higher maintenance costs.
Liquidity and Capital Resources
We continually monitor our actual and forecasted cash flows, our liquidity and our capital requirements in order to properly manage our cash needs based on the capital intensive nature of our business. Our capital requirements include fixed asset purchases (including capital expenditures for vehicles), debt servicing, landfill development and cell construction, landfill site and cell closure, as well as acquisitions. We generally meet our liquidity needs from operating cash flows and borrowings from a revolving credit facility.
Cash and cash equivalents, restricted assets and long-term debt balances (in millions) are as follows:
Restricted assets:
Capital projects
Landfill closure
Total restricted assets
Long-term debt:
Current portion
Long-term portion
Total long-term debt
Summary of Cash Flow Activity
Cash flows (in millions) are as follows:
Net cash used in investing activites
34
Net cash provided by (used in) operating activities.
Operating cash flows (in millions) are as follows:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Gain on divestiture
Adjusted net income before changes in assets and liabilities, net
Changes in assets and liabilites, net
The most significant items affecting the change in our operating cash flows are summarized below:
Net cash used in investing activities.
The most significant items affecting the change in our investing cash flows are summarized below:
Net cash provided by financing activities.
The most significant items affecting the change in our financing cash flows are summarized below:
35
Outstanding Long-Term Debt
Asset-Based Lending Facility
The ABL Facility consists of a revolving credit facility with loans thereunder being available up to an aggregate principal amount of $190.0 million, subject to availability under a borrowing base formula as defined in the ABL Facility agreement. We have the right to request, at our discretion, an increase in the amount of loans under the ABL Facility by an aggregate amount of $100.0 million, subject to the terms and conditions set forth in the ABL Facility agreement. Interest accrues at LIBOR plus between 1.75% and 2.50%, subject to the terms of the ABL Facility agreement and is set at LIBOR plus 2.25% as of March 31, 2016. The ABL Facility matures on February 26, 2020. If we fail to refinance the 2019 Notes on or before November 16, 2018, the maturity date of the ABL Facility will be November 16, 2018. The ABL Facility is guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries and is collateralized by certain qualified accounts receivable-trade, inventory and property, plant and equipment.
The ABL Facility agreement requires us to maintain minimum consolidated EBITDA for the twelve months preceding the measurement date measured at the end of each fiscal quarter. Minimum consolidated EBITDA is a non-GAAP financial measure that should not be considered an alternative to any measure of financial performance calculated and presented in accordance with generally accepted accounting principles in the United States. As of March 31, 2016, we were in compliance with the minimum consolidated EBITDA financial covenant contained in the ABL Facility agreement as follows (in millions):
Asset-Based Revolving Credit Facility Financial Covenants
Minimum consolidated EBITDA (1)
Net cash provided by operating activities
Changes in assets and liabilities, net of effects of acquisitions and divestitures
Loss on debt extinguishment
Stock based compensation, net of excess tax benefit
Impairment of investments
Interest expense, less amortization of debt issuance costs and discount on long-term debt
Provision for income taxes, net of deferred taxes
EBITDA adjustment as allowed by the ABL Facility agreement
Other adjustments as allowed by the ABL Facility agreement
Minimum consolidated EBITDA
36
If the borrowing availability is less than a minimum availability threshold determined in accordance with the ABL Facility agreement, we are then subject to additional financial ratio covenants. As of March 31, 2016, our borrowing availability was greater than the minimum availability threshold as follows (in millions):
Availability (2)
As of March 31, 2016, our additional financial ratio covenants, as defined in the ABL Facility agreement (if they would have been applicable) were as follows:
Asset-Based Revolving Credit Facility Financial Ratio Covenants
Minimum fixed charge coverage ratio
Maximum consolidated first lien leverage ratio
Based on the seasonality of our business, operating results in the late fall, winter and early spring months are generally lower than the remainder of our fiscal year. Given the cash flow impact that this seasonality, the capital intensive nature of our business and the timing of debt payments has on our business, we typically incur higher debt borrowings from the ABL Facility in order to meet our liquidity needs during these times. Consequently, our availability and performance against our financial covenants tighten during these times as well.
In addition to the financial covenants described above, the ABL Facility agreement also contains a number of important customary affirmative and negative covenants which restrict, among other things, our ability to sell assets, incur additional debt, create liens, make investments, and pay dividends. As of March 31, 2016, we were in compliance with all covenants under the ABL Facility agreement. We do not believe that these restrictions impact our ability to meet future liquidity needs.
37
Tax-Exempt Financings
New York Bonds
As of March 31, 2016, we had outstanding $25.0 million aggregate principal amount of New York Bonds. The New York Bonds, which are unsecured and guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries, accrue interest at 3.75% per annum through December 1, 2019, at which time they may be converted from a fixed rate to a variable rate, and interest is payable on June 1 and December 1 of each year. An additional $15.0 million aggregate principal amount of New York Bonds may be offered under the same indenture in the future. The New York Bonds mature on December 1, 2044. We borrowed the proceeds of the New York Bonds to repay borrowings under our Senior Credit Facility for qualifying property, plant and equipment assets purchased in the state of New York.
Maine Bonds
As of March 31, 2016, we had outstanding $21.4 million aggregate principal amount of Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2005R-2 (“FAME Bonds 2005R-2”). The FAME Bonds 2005R-2, which are unsecured and guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries, accrue interest at 6.25% per annum through January 31, 2017, at which time they may be converted from a fixed to a variable rate, and interest is payable semiannually in arrears on February 1 and August 1 of each year. The FAME Bonds 2005R-2 mature on January 1, 2025.
As of March 31, 2016, we had outstanding $3.6 million aggregate principal amount of Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2005R-1 (“FAME Bonds 2005R-1”). The FAME Bonds 2005R-1 are variable rate bonds secured by a letter of credit issued by our administrative agent bank and interest is payable semiannually in arrears on February 1 and August 1 of each year. The FAME Bonds 2005R-1 mature on January 1, 2025. We borrowed the proceeds of the FAME Bonds 2005R-1 and 2005R-2 to pay for certain costs relating to the following: landfill development and construction; the acquisition of vehicles, containers and related equipment for solid waste collection and transportation services; improvements to existing solid waste disposal, hauling, transfer station and other facilities; other infrastructure improvements; and the acquisition of machinery and equipment for solid waste disposal operations owned and operated by us, or a related party, all located in the state of Maine.
As of March 31, 2016, we had outstanding $15.0 million aggregate principal amount of FAME Bonds 2015. The FAME Bonds 2015, which are unsecured and guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries, accrue interest at 5.125% per annum through August 1, 2025, at which time they may be converted from a fixed to a variable rate, and interest is payable semiannually in arrears on February 1 and August 1 of each year. An additional $15.0 million aggregate principal amount of FAME Bonds 2015 may be offered under the same indenture in the future. The FAME Bonds 2015 mature on August 1, 2035. We borrowed the proceeds of the offering of the FAME Bonds 2015 to finance or refinance the costs of certain of our solid waste landfill facilities and solid waste collection, organics and transfer, recycling and hauling facilities, and to pay for the costs of the issuance of the FAME Bonds 2015.
Vermont Bonds
As of March 31, 2016, we had outstanding $16.0 million aggregate principal amount Vermont Economic Development Authority Solid Waste Disposal Long-Term Revenue Bonds Series 2013 (“Vermont Bonds”). The Vermont Bonds, which are unsecured and guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries, accrue interest at 4.75% per annum through April 1, 2018, at which time they may be converted from a fixed rate to a variable rate, and interest is payable semiannually in arrears on April 1 and October 1 of each year. The Vermont Bonds mature on April 1, 2036. We borrowed the proceeds of the Vermont Bonds to repay borrowings under our Senior Credit Facility for qualifying property, plant and equipment assets purchased in the state of Vermont.
New Hampshire Bonds
As of March 31, 2016, we had outstanding $11.0 million aggregate principal amount of Solid Waste Disposal Revenue Bonds Series 2013 issued by the Business Finance Authority of the State of New Hampshire (“New Hampshire Bonds”). The New Hampshire Bonds, which are unsecured and guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries, accrue interest at 4.00% per annum through October 1, 2019, at which time they may be converted from a fixed rate to a variable rate, and interest is payable in arrears on April 1 and October 1 of each year. The New Hampshire Bonds mature on April 1, 2029. We borrowed the proceeds of the New Hampshire Bonds to repay borrowings under our Senior Credit Facility for qualifying property, plant and equipment assets purchased in the state of New Hampshire.
38
As of March 31, 2016, we had outstanding $366.1 million aggregate principal amount of 2019 Notes, which will mature on February 15, 2019. The 2019 Notes accrue interest at the rate of 7.75% per annum and interest is payable semiannually in arrears on February 15 and August 15 of each year. The 2019 Notes are fully and unconditionally guaranteed on a senior subordinated basis by substantially all of our existing and future domestic restricted subsidiaries that guarantee our ABL Facility.
The indenture governing the 2019 Notes contains certain negative covenants which restrict, among other things, our ability to sell assets, make investments in joint ventures, pay dividends, repurchase stock, incur debt, grant liens and issue preferred stock. As of March 31, 2016, we were in compliance with all covenants under the indenture governing the 2019 Notes, and we do not believe that these restrictions impact our ability to meet future liquidity needs except that they may impact our ability to increase our investments in non-wholly owned entities, including the joint ventures to which we are already party.
Shelf Registration
We have filed a universal shelf registration statement with the SEC pursuant to which we may from time to time issue securities in an amount of up to $190.0 million, after giving consideration to the $60.0 million aggregate principal amount of additional 2019 Notes we issued in February 2015 pursuant to the registration statement.
Inflation
Although inflationary increases in costs have affected our historical operating margins, we believe that inflation generally has not had a significant impact on our operating results. Consistent with industry practice, most of our contracts provide for a pass-through of certain costs to our customers, including increases in landfill tipping fees and in some cases fuel costs, intended to mitigate the impact of inflation on our operating results. We have also implemented a number of operating efficiency programs that seek to improve productivity and reduce our service costs, and a fuel and oil recovery fee, which is designed to recover escalating fuel price fluctuations above an annually reset floor. Based on these implementations, we believe we should be able to sufficiently offset most cost increases resulting from inflation. However, competitive factors may require us to absorb at least a portion of these cost increases. Additionally, management’s estimates associated with inflation have had, and will continue to have, an impact on our accounting for landfill and environmental remediation liabilities.
Regional Economic Conditions
Our business is primarily located in the northeastern United States. Therefore, our business, financial condition and results of operations are susceptible to downturns in the general economy in this geographic region and other factors affecting the region, such as state regulations and severe weather conditions. We are unable to forecast or determine the timing and/or the future impact of a sustained economic slowdown.
Seasonality and Severe Weather
Our transfer and disposal revenues historically have been higher in the late spring, summer and early fall months. This seasonality reflects lower volumes of waste in the late fall, winter and early spring months because:
39
Because certain of our operating and fixed costs remain constant throughout the fiscal year, operating income is therefore impacted by a similar seasonality. Our operations can also be adversely affected by periods of inclement or severe weather, which could increase our operating costs associated with the collection and disposal of waste, delay the collection and disposal of waste, reduce the volume of waste delivered to our disposal sites, increase the volume of waste collected under our existing contracts (without corresponding compensation), decrease the throughput and operating efficiency of our materials recycling facilities, or delay construction or expansion of our landfill sites and other facilities. Our operations can also be favorably affected by severe weather, which could increase the volume of waste in situations where we are able to charge for our additional services provided.
Our Recycling segment experiences increased volumes of fiber in November and December due to increased newspaper advertising and retail activity during the holiday season.
Limitations on Ownership of Notes
Pursuant to Section 2.19 of the indenture governing the 2019 Notes and the provisions of the FAME Bonds 2015, FAME Bonds 2005R-2, New Hampshire Bonds, New York Bonds and Vermont Bonds, no beneficial holder of the 2019 Notes, FAME Bonds 2015, FAME Bonds 2005R-2, New Hampshire Bonds, New York Bonds and/or Vermont Bonds is permitted to knowingly acquire 2019 Notes, FAME Bonds 2015, FAME Bonds 2005R-2, New Hampshire Bonds, New York Bonds and/or Vermont Bonds if such person would own 10% or more of the consolidated debt for which relevant subsidiaries of ours are obligated (and must dispose of 2019 Notes, FAME Bonds 2015, FAME Bonds 2005R-2, New Hampshire Bonds, New York Bonds and/or Vermont Bonds or other debt of ours to the extent such person becomes aware of exceeding such threshold), if such ownership would require consent of any regulatory authority under applicable law or regulation governing solid waste operators and such consent has not been obtained. We will furnish to the holders of the 2019 Notes, FAME Bonds 2015, FAME Bonds 2005R-2, New Hampshire Bonds, New York Bonds and Vermont Bonds, in each quarterly and annual report, the dollar amount of our debt that would serve as the threshold for evaluating a beneficial holder’s compliance with these ownership restrictions. As of March 31, 2016, that dollar amount was $52.2 million.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities, as applicable, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances. The results of their evaluation form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions and circumstances. Our significant accounting policies are more fully discussed in Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
Adoption of New Accounting Pronouncements
For a description of the new accounting standards adopted that may affect us, see Note 2 to our consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Volatility
Information about market risks as of March 31, 2016, does not differ materially from that described in Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
40
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2016. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2016, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
b) Changes in internal controls over financial reporting. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
41
PART II.
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of our business and as a result of the extensive governmental regulation of the solid waste industry, we are subject to various judicial and administrative proceedings involving state and local agencies. In these proceedings, an agency may seek to impose fines or to revoke or deny renewal of an operating permit held by us. From time to time, we may also be subject to actions brought by special interest or other groups, adjacent landowners or residents in connection with the permitting and licensing of landfills and transfer stations, or allegations of environmental damage or violations of the permits and licenses pursuant to which we operate. In addition, we have been named defendants in various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the ordinary operation of the waste management business.
On or about November 6, 2015, Expera Old Town, LLC (“Expera”) filed a lawsuit against us in Maine Superior Court, seeking damages for breach of contract and unjust enrichment and an action for declaratory judgment (the “Lawsuit”). Expera was a successor-in-interest to a contract between us and Old Town Fuel and Fiber (“OTFF”), the former owner of a pulp manufacturing facility (“Facility”) located in Old Town, Maine (the “Contract”). Expera purchased the Facility during the pendency of the bankruptcy of OTFF. Since the filing of the Lawsuit, Expera has sold the Facility and related assets to MFGR LLC (“MFGR”). MFGR alleged that we had the obligation to provide a specialized type of wood fuel to the Facility or, alternatively, that we owed a “Fuel Replacement Fee” of up to $2.0 million a year (subject to the possibility of certain credits against such payments). The Contract was to expire in 2036.
On or about February 10, 2016, we reached an agreement in principle with MFGR to dismiss the Lawsuit with prejudice, and to resolve all outstanding claims of any nature including future claims which could arise under the Contract, and a Joint Stipulation of Dismissal with Prejudice was filed with the Superior Court on April 15, 2016. On or about April 12, 2016, the Parties entered into a Settlement Agreement (“SA”) along with other ancillary agreements. Pursuant to the SA, we will pay MFGR $1.3 million upon execution of the SA, and $0.4 million a year for five years following execution of the SA. Accordingly, taking into account the net present value of the settlement payments, we have recorded a reserve of $2.6 million as of March 31, 2016. This includes a contract settlement charge of $1.9 million and $0.7 million of operating expenses recorded in the fiscal year ended December 31, 2015. We also have reserved less than $0.1 million as of March 31, 2016 for legal costs associated with the Lawsuit and SA
We have also entered into a new leachate disposal agreement at market prices with MFGR for the treatment of leachate from the landfill managed by us for the State of Maine located in Old Town, Maine (“Juniper Ridge”), and MFGR has entered into a waste disposal agreement at market prices with us for the disposal at Juniper Ridge of waste materials produced in the demolition or re-purposing of the Facility.
In October 2015, our Southbridge Recycling and Disposal Park, Inc. (“SRD”) subsidiary reported to the Massachusetts Department of Environmental Protection (“MADEP”) results of analysis of samples collected pursuant to our existing permit from private drinking water wells located near the landfill operated by SRD. Those results indicated the presence of contaminants above the levels triggering notice and response obligations under MADEP regulations. In response to those
42
results, we are carrying out an Immediate Response Action pursuant to state law. Further, we have implemented a plan to analyze and better understand the groundwater near the landfill and we are investigating with the objective of identifying the source or sources of the elevated levels of contamination measured in the well samples. If it is determined that some or all of the contamination originated at the landfill, we will work with the Town of Southbridge, the landfill owner, to evaluate and possibly allocate the liabilities related to that contamination. In February 2016, we received a Notice of Intent to Sue under the Resource Conservation and Recovery Act from a law firm representing residents from approximately 40 homes located in the vicinity of the landfill, indicating its intent to file suit against us. The existence of those contaminants and any related lawsuit or other action could delay our ongoing permitting activities at Southbridge and result in costs and liabilities, each of which could have a material impact on our results of operations and financial condition.
On December 20, 2000, the State of New York Department of Environmental Conservation (“DEC”) issued an Order on Consent (“Order”) which named Waste-Stream, Inc. (“WSI”), our subsidiary, General Motors Corporation (“GM”) and Niagara Mohawk Power Corporation (“NiMo”) as Respondents. The Order required that the Respondents undertake certain work on a 25-acre scrap yard and solid waste transfer station owned by WSI in Potsdam, New York, including the preparation of a Remedial Investigation and Feasibility Study (“Study”). A draft of the Study was submitted to the DEC in January 2009 (followed by a final report in May 2009). The Study estimated that the undiscounted costs associated with implementing the preferred remedies would be approximately $10.2 million. On February 28, 2011, the DEC issued a Proposed Remedial Action Plan for the site and accepted public comments on the proposed remedy through March 29, 2011. We submitted comments to the DEC on this matter. In April 2011, the DEC issued the final Record of Decision (“ROD”) for the site. The ROD was subsequently rescinded by the DEC for failure to respond to all submitted comments. The preliminary ROD, however, estimated that the present cost associated with implementing the preferred remedies would be approximately $12.1 million. The DEC issued the final ROD in June 2011 with proposed remedies consistent with its earlier ROD. An Order on Consent and Administrative Settlement naming WSI and NiMo as Respondents was executed by the Respondents and DEC with an effective date of October 25, 2013. On January 29, 2016, a Cost-Sharing Agreement was executed between WSI, NiMo, Alcoa Inc. (“Alcoa”) and Reynolds Metal Company (“Reynolds”) whereby Alcoa and Reynolds elected to voluntarily participate in the onsite remediation activities at a 15% participant share. It is unlikely that any significant expenditures relating to onsite remediation will be incurred until the fiscal year ending December 31, 2017. WSI is jointly and severally liable with NiMo, Alcoa and Reynolds for the total cost to remediate.
ITEM 1A. RISK FACTORS
Our business is subject to a number of risks, including those identified in Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, that could have a material effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from period to period. As of March 31, 2016, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. We may disclose additional changes to our risk factors or disclose additional factors from time to time in our future filings with the SEC.
43
ITEM 6. EXHIBITS
The exhibits that are filed as part of this Quarterly Report on Form 10-Q or that are incorporated by reference herein are set forth in the Exhibit Index hereto.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Christopher B. Heald
Christopher B. Heald
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
/s/ Edmond R. Coletta
Edmond R. Coletta
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
44
Exhibit Index
45